The market's recent plunge has slashed valuations of many blue chip stocks so deeply that dozens of them are now selling below book value, making them attractive plays for value-oriented investors. Bargain buys based on price/book ratios, or shareholder equity per share, include depressed stocks like Goldman Sachs Group (GS), American International Group Inc. (AIG), Allergan PLC (AGN), Molson Coors Brewing Co. (TAP), Prudential Financial Inc. (PRU), The Kraft Heinz Co. (KHC), Western Digital Corp. (WDC), Parsley Energy Inc. (PE), Encana Corp. (ECA) and Morgan Stanley (MS), per Barron’s.
10 Bargain Plays Based on Price/Book:
- Goldman Sachs; 0.87
- American International; 0.60
- Allergan; 0.65
- Molson Coors; 0.89
- Prudential Financial; 0.73
- Kraft Heinz; 0.81
- Western Digital; 0.97
- Parsley Energy; 0.83
- Encana; 0.88
- Morgan Stanley; 0.99
Source: Yahoo Finance
Investors Ditch Growth for Value
Value investing, championed by market legends such as Warren Buffett and his mentor Benjamin Graham, is coming back into style as the S&P 500 comes off its worst year since 2008. While nearly all sectors have been hard hit by the market downdraft, stock that are cheap based on fundamental analysis have suffered less. Meanwhile, growth stocks that have carried the decade-running bull market, including the FAANG giants, have lost favor among a growing number of investors seeking out safer bets in a rocky market.
“When I look at that screen and see all that red, all I see are stocks that are on sale,” said Scott Minerd, Guggenheim Partners’ chairman of investments and global chief investment officer, in an interview with Bloomberg TV. “It’s a good time to maybe do some shopping.”
Value investors focus on book value, given a low price to book value provides downside support as a proxy for a company’s liquidation value. It's important to note that even stocks with attractive price to book values can become sour bets if they yield poor returns or the company has weak prospects. Investors should be wary of companies that look inexpensive on a price to book ratio, yet are operating in the red, instead focusing on those with strong profits.
Tangible book value, which excludes goodwill and other intangible assets, is often viewed as a better metric of conservative liquidation value, yet is a tougher measure of shareholder equity.
Goldman Sachs trades below its tangible book value, at around $172 as of Wednesday close, versus $186, per Barron’s. In 2018, the Wall Street bank fell victim to fears over the yield curve and macroeconomic uncertainty, as well as company specific headwinds including the 1MDB corruption scandal in Malaysia. Despite clear risks such as regulatory overhang from its headline scandal, bulls view the sell-off as overdone. Goldman stock trades just under 7 times forward earnings, per Yahoo Finance.
Shares of pharmaceutical giant Allergan have a negative tangible book value due the high value of the company’s goodwill and other intangible assets that often arise from acquisitions. A mixture of company specific bad news and the general sell-off in the stock market has led the stock to trade around 8.3 times forward earnings. While shares plunged on an announcement that the company would stop selling its textured breast implants and tissue expanders in Europe due to a compulsory recall request, these products account for merely 1% of the firm's total sales, per Seeking Alpha.
What’s Next for Investors?
While stocks have become less expensive after the series of selloffs in 2018, many experts argue most stocks are still not cheap. Investors should be picky moving forward into the new year, taking into account how much further these stocks can fall and weighing whether or not they have the earnings and revenue growth to make them winners in the long-term.
Ultimately, for those willing to dive into the fundamentals, geared with patience and a long-term investment horizon, going against the crowd with a value-oriented approach could generate sizable returns. With many industry powerhouses lingering near bear market territory, now could be a prime opportunity to get in at a discount.